斯倫貝謝公司 (SLB) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Schlumberger Earnings conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to our host, Mr.

Malcolm Theobald, Vice President of Investor Relations.

Please go ahead.

Thank you, Julie.

Welcome to today's second quarter 2008 results conference call for Schlumberger Limited.

Before we begin, I'd like to review the logistics and format of the call.

Some of the information in today's call may include forward-looking statements as well as nonGAAP financial measures.

A detailed disclaimer and other important information are included in the F.A.Q.

document available on our website or upon request.

And now for the call participants and format.

Today's call is being hosted from Paris, where I am joined by both Andrew Gould, Chairman and Chief Executive Officer, and also Simon Ayat, our Chief Financial Officer.

Prior to Andrew's overview of the second quarter and his comments on the outlook, Simon will first review the quarter's financial results.

And now, I'll turn the call over to Simon.

Thank you, Malcolm.

Ladies and gentlemen, thank you for participating in this conference call.

Second quarter income from continuing operations was $1.16 per share up $0.10 cents sequentially and $0.14 cents above the same quarter of last year.

Oil field services second quarter revenue grew 8% sequentially, reflecting strong growth in all geographical areas despite the impact of Canada's spring breakup on North America.

Outside of North America, oil field services revenue grew 11% sequentially.

All technologies grew sequentially with IPM, completions, DCS, testing, SIS and double digit growth rates while WesternGeco was essentially flat with the first quarter.

Oil field services generated $1.7 billion in pretax operating income, up $202 million from the first quarter with margins improving by 129 basis points to 28.1%.

Outside North America operation, margins improve by 218 basis points to 29.4%.

By area, oil field services highlights were as follows, which comments on sequential basis.

North America pretax margin declined 167 basis points to 23.9% where the improvements in the US Land GeoMarkets which witnessed strong well services and line activities and in the US gulf coast which so increased demand of high margin drilling and measurements technologies were more than offset by the impact of the spring breakup in Canada.

Without the impact of Canada, North America margins improved sequentially despite the continued increase in costs of operations.

Latin America pretax margin rebounded by 296 basis points to 23% primarily due to increased demand for high margin technologies offshore Mexico central America.

Together was a more favorable activity mix in Brazil.

In addition, l.P.M.

project start-up cost on land is Mexico, Central America also contributed to this improvement.

For E.C.A.

, the Europe C.I.S., Africa area, the pretax margin improved 181 basis points to 28.2%.

The North Sea experienced a record quarter with high margin drilling and measurement technologies gaining from higher drilling activity and wireline benefiting from the drilling of high pressure high temperature wells.

In addition, the rebound of east Russia following the slowdown in the winter and the more favorable activity mix in west and south Africa GeoMarket also contributed to this improvement.

This performance was partially offset by operational delays in the Nigeria and Gulf of Guinea GeoMarket.

Middle east Asia pretax margin increased by 148 basis points to 36.3%, most notably due to an increased demand for high margin wireline drilling and measurement and well services technologies in the China, Japan, Korea, Brunei, Malaysia, Philippines and Gulf GeoMarkets.

This performance was also driven by a more favorable activity mix for exploration-driven services in Australia and Thailand Vietnam.

However, these increases were partially offset by slowdown in India and Qatar.

WesternGeco pretax income was $196 million at a margin of 29.2% were in line with the previous quarter.

As improvements in land and data processing performance were partially offset by the impact of the multiclient sales mix in North America.

Now turning to Schlumberger as a whole, the effective tax rate was 20.9%, which was higher than last quarter due to the geographic mix of earnings in WesternGeco as well as the positive impact in the prior quarter of the favorable resolution of tax examination in a number of countries.

The E.T.R.

is expected to be in the low 20s for the total year.

The earnings for the quarter included $41 million of expenses relating to stock-based compensation costs.

Net debt was $2 billion at the end of the quarter.

Signigicant liquidity events during the quarter included $555 million for stock buyback program, $1 billion of capex, including $107 of multiclient services kept alive.

During the quarter, we bought back 5.45 million shares for $555 million at at average price of $101.90 per share.

Now I turn the conference over

Thank you, Simon.

Good morning, everybody.

The strong sequential growth seen in the second quarter throughout the Eastern hemisphere led to the improved performance in all areas except North America, where the effects of strong growth in the lower 48 states and the US Gulf of Mexico was more than offset by a prolonged spring breakup in Canada.

Growth was helped by increased drilling efficiency in the North Sea, improved performance and lower mobilization costs on IPM projects in Mexico and Russia and favorable exploration mix particularly in the North Sea, Eastern Siberia and southeast Asia.

The quarter also saw increased demand for well placed technologies and rigless work as operators strive to increase production from existing fields.

Looking at the areas in more detail, the US Land GeoMarkets in North America recorded strong revenue increases driven by robust demand for well services and wireline technologies, in addition to the rebounding activity following the end of the seasonal winter weather restrictions.

Offshore, the US Gulf Coast also reduced its strong growth through demand for drilling and measurements services and a surge in completion product sales.

These increases were largely offset by the seasonal slowdown in Canada.

In Latin America, sequential revenue growth was strong across the area led by Mexico's central America GeoMarket due to the ramp up of IPM projects, as well as to higher offshore activities.

Peru, Colombia, Ecuador saw significant improvements due to higher demand for wireline, drilling and measurements technologies, together with increased gain share on IPM activity in Colombia.

While the Venezuela, Trinidad and to Tobago GeoMarket benefited from strong demand for well services and wireline technologies.

In the Brazil GeoMarket, growth was driven by higher exploration activity and increased SIS product sales.

The Argentina, Bolivia, Chile GeoMarket improved on strong demand for well services and wireline technologies, however, growth was partially offset by operational delays in Argentina.

Sequential revenue growth in Europe, C.I.S.

and Africa was driven primarily by demand for all technologies across the North Sea GeoMarket, particularly by drilling and measurements and high pressure high temperature wireline services.

Strong activity for all technologies in western southern Africa together with increased demand for exploration related activities in east Russia also contributed to growth.

In the middle east Asia area, sequential revenue growth was led by the Arabian GeoMarket with high demand for well services and testing services technologies together with increased completion system product sales.

The China, Japan, Korea GeoMarket experienced a robust rebound in activity following the winter slowdown in the first quarter, while Australia, Papua New Guinea grew on increased offshore exploration activity, but resulted in strong demand for wireline, drilling and measurement services.

Growth was also recorded from exploration related wireline services in the Thailand, Vietnam and from wireline and well services technologies and SIS product sales in the Gulf GeoMarket.

Well services technology and artificial lift products were particularly strong in Indonesia.

Activity declines in India and Qatar partially offset these positive factors.

Oil field services bidding activity during the quarter was strong, particularly for drilling and measurements, wireline and testing services.

This led to a number of significant contract awards, particularly in the area of drilling service where advances in rotary steerable systems and well placement technologies coupled with increased reliability are critical to operators and to date environment are very high spread costs for offshore rigs.

WesternGeco's sequential revenue was essentially flat, with increased in multiclient sales and data were offset by the seasonal drop in Marine activity.

Significant increases were recorded in the backlog for land operations while Marine contract bidding activity remained robust.

Newly awarded activity included a contract in Indonesia for the proprietary WesternGeco coil shooting acquisition technique that uses a single Q marine vessel to acquire (inaudible) data thus significantly increasing operational efficiency.

Also, a contract in Kuwait, for the largest q-land acquisition and processing contract ever won that is expected to last for two years.

Turning now to other events.

We made a number of acquisitions during the quarter that increased our capabilities or added specific technologies to our portfolio.

In Canada, the shareholders of Saxon Drilling voted to accept the Schlumberger offer made jointly with First Reserve Capital to acquire the company.

Schlumberger has enjoyed a long association with Saxon, which has included operating joint ventures in Mexico and Colombia which deliver drilling services to support integrated project management activities.

Also in Canada, we acquired the business of Extreme Engineering, Limited, a leading supplier of unmanned MWD systems to land markets in the US and Canada.

This acquisition will help facilitate the rapid uptake of rotary-steerable systems technology in the highly cost sensitive drilling environments.

Other technology acquisitions included Integrated Exploration Systems, the Germany-based technology leader, Germany-based technology leader in petroleum systems modeling.

And Staag Imaging, a Houston-based provider of leading-edge depth imaging technologies for seismic data processing.

Both these acquisitions add further strength to our seismic offering in an exploration market that we expect to see more and more demand for technology integration.

At the beginning of the year, we predicted a more complex growth pattern for 2008.

Notably we were uncertain of the evolution of North American natural gas activity and the extent to which delays of the completion of new build offshore rigs would affect growth.

We anticipated solid increases in the Eastern hemisphere land rig count.

At the half year, the uncertainty around the direction of natural gas drilling in North America has been removed and extremely high commodity prices have led operators to increase their budgets overseas.

We anticipate that approximately 35 new offshore rigs will enter the fleet in the remaining half of the year.

The overseas land rig count has evolved, much as we predicted.

It appears customers are responding vigorously to the current commodity price levels.

Inflationary pressures, particularly certain commodity supplies and some categories of personnel are increasing worldwide but particularly in North America where the rapid ramp up in activities is exaggerating the trend.

Improved pricing will be key to further investment in some markets.

In the longer term, we remain convinced that absent the deep worldwide recession leading to a steep drop in demand, higher levels of investment will have to be sustained to bring some equilibrium to the market.

We therefore re-iterate our "stronger for longer" view of the current cycle of exploration and production spending.

It is significant that during the quarter the industry an additional 28 new offshore rigs were reported ordered from shipyards with delivery dates out to 2012, increasing the total on order to more than 180.

I will now hand the call back to Malcolm.

Thank you, Andrew.

We will now open the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go to the line of Kurt Hallead, with RBC Capital.

Please go ahead.

Good morning, Andrew.

How much conviction do you have in North America beyond year end given the rapid increase in production and do you think you'll be able to book some net pricing gains across all your product lines before the end of the year?

I actually haven't even tried to make myself a full conviction on 2009.

I think it's too early.

I think that there is some pricing power going forward in the spot market, and I think that how much pricing power we have in the big contract cycle towards the end of the year is going to depend on the view of 2009.

But I think it's a bit early for me to -- I would be dishonest if I said I thought I knew what was going to happen in 2009 yet.

Okay.

Then on the international, you state in your comments that you are seeing a ramp in international E.N.P.

spend.

So would you be comfortable with international revenue growth in the mid-20s for 2009?

I have no reason to believe that it won't be above 20%.

Okay.

But don't try and tie me down further than that.

I won't do that.

Before I give up the floor, in terms of the geographics from higher to lower, how do you think the geographic markets rank in growth?

Well, I think 2008 Latin America will be the star.

And 2009 actually, I think, it's going to be very much influenced by the arrival of the offshore rigs which is North Sea, west Africa, gulf of Mexico, and to some extent Brazil.

And then on land, I actually think that Russia will be very strong again.

Great.

Thank you.

Sorry, didn't mean to interrupt.

Sorry.

That's okay.

Thank you very much, Andrew.

Thank you.

We'll go to the line of Ole Slorer with Morgan Stanley.

Please go ahead.

Thank you very much.

Nice to hear you in the more confident mood again, Andrew than the previous three quarters.

What am I supposed to say?

I'd like to say it the way I see it.

I know you do, and I'm glad you're seeing things a little bit different now.

And Cap Ex at the beginning of the year, you highlighted at that point in time, was 13% and we felt, I think, at the time of the conference call that it was low.

Now you're going up to 29% year-over-year, which seems to send a very confident tone for how you see your business.

Can you talk a little bit about what product lines, what regions that you have grown more confident on to have this type of a Cap Ex relative to the beginning of the year?

Well, I would say at the beginning of the year, Cap Ex was very much oriented to how we saw the evolution of the offshore rig fleet but what is coming in supplemental now is probably the big increases in land activity that we have not foreseen and actually it's being effected by some of the contract wins we've had.

Anything there on the product line?

I think the bulk of our Cap Ex is the four big ones.

So it's wireline, drilling and measurements, testing and well services.

Okay.

Just one follow-up.

We're seeing the biggest price increases with anything to do with metal, whether its drill pipe -- I would imagine that other form of product like completion or rental tools or anything to do with metal in the world could be getting surprisingly tight.

How do you see those segments in the market now?

You have to remember in most of our tools we're using specialty alloys.

We're not using the commoner garden or I won't say commoner garden, we're not using the steels used in drill pipe or casing.

So the price increases in specialty alloys are horrible.

So I mean look at chrome 25 and stuff like that.

The price has doubled.

There's not an availability issue.

So there is a cost issue but not an availability issue in the alloys that we use mostly.

So the ability to raise prices to compensate for this?

So far, it's too early to say definitively that it's okay, but it's going quite well.

Thank you very much.

Thank you.

We'll go to the line of Bill Herbert with Simmons & Company.

Please go ahead.

Thanks.

Good morning.

Good morning, Bill.

Andrew, sort of elevating the perspective here and speaking broadly about international margins, they were nicely improved this quarter.

But going forward, reconcile the tension for me, between, on the one hand, increasing drilling and technological intensity and rising offshore content on the one hand - - with an environment in which life is still fairly competitive on these bigger projects.

Some of these projects are being won not necessarily from you with sort of seemingly start prices and bids.

Also cost inflation continues to be relatively unabated.

So, you know, given all those elements, where do margins go from here internationally?

Well, I think if people want to maintain or increase their international margins, they're going to have to pay attention to inflation.

Particularly in any sort of project that requires a great deal of third party supplies.

In technology centered projects or big offshore drilling or stuff like that, I think that the operator's spread cost of rigs is so huge compared to the marginal increase in pricing that we need, that it's not a big issue.

Reliability is becoming more important every day.

So I don't think that people will win very large offshore drilling projects on price necessarily.

Okay.

So specifically, do you expect international margins to continue improving?

I think if the -- so I said in the beginning of the year, Bill, it will be lumpy, right?

Yep.

So in a quarter where we have really good exploration activity and really strong drilling activity like this quarter, there's no doubt that margins can increase.

In a quarter where you have seasonal weather in the North Sea, you know, China shuts down for the winter, then you probably have margin declines.

So I don't think it's going to be a constant linear increase over quarters, but on an annual basis provided the exploration holds up, I don't see why we shouldn't still have some room to run.

Okay.

Then the follow-up here with regard to North American pressure pumping, I was wondering as to how successful you were in the second quarter and how successful you are on a leading edge basis with respect to getting fuel surcharges implementing and cost inflation as it relates to fuel addressed?

Fuel surcharges we are more than reasonably successful.

Okay.

Great.

So, North American margins came down relatively sharply quarter-on-quarter, yes, largely due to Canada - -

No, no, as Simon said at the beginning, North American GeoMarket margins increased in every GeoMarket except Canada.

Okay, good.

But the effect of the prolonged breakup was such that that nullified the effect of the global North America level.

Thank you very much.

Next, we'll go to the line of Dan Pickering, with Pickering Energy.

Please go ahead.

Good morning.

Andrew, I just want to make sure I understand your commentary around the international operators.

You said a vigorous response - - that combined with kind of the 20% plus I think you've been talking about high teens international growth rates.

It does sound like international clearly has picked up within the last two, three, four months.

I was surprised as I think we all were by the strength of the rebound coming out of the winter.

So part of that was just the normal huge pickup in drilling efficiency in the North Sea, stuff like that.

Part of it was a real effort to where people could to increase activity, particularly on land where as you know it's much easier to increase activity than offshore.

Sure.

Okay.

But, we were surprised by the strength of their rebound.

Thank you.

Could you generally comment your joint venture partner, MI, is now in the directional drilling business so SmithKline W.H.Q.

How does that affect your thinking about the joint venture going forward?

And what are the mechanics associated with that?

I'm not quite sure what you mean by the mechanics, Dan, but, MI is and I hope will remain very strong partner.

There will be competitive situations which will be quite difficult to manage.

They're not very common.

I don't see any reason why we shouldn't continue to enjoy a good material relationship with them -- with MI.

Great.

Thank you.

Our next question is from Michael LaMotte of JP Morgan.

Good morning.

Good morning.

First, Andrew, I was struck by the comment in the press release concerning the Continental resources.

You talked in the past about the technological evolution within the North American pumping business and it sort of feels like seeing press releases, et cetera, that there's perhaps more of a technological revolution going on in that business.

Can you talk about the pace of sort of technology uptake and what that could mean for margins, just beyond pure price?

Actually, Michael, I think like any new play, operators don't -- they will not pay for technology until they understand what it can do for them.

Now we're getting to the stage in shell gas where a combination of horizontal wells and stage fracturing together with this capacity that we have to monitor FRACs in realtime.

Its very different - - If you monitor it and give the results to the customer, it's what we call internally a so-what service.

You told me what you did but you can't do anything about it.

If you're doing it in realtime it allows you to start to look at modifying the engineering of the F.R.A.C.

while you are performing it, which is really quite important.

So I think it's not just Schlumberger, by the way, but the leading player in pressure pumping are now getting to the stage where there is differentiation in what they can do.

And to a certain extent in a tight market that will reflect well in pricing, in a very slight market, it will allow them to maintain pricing.

But there's absolutely no doubt that the technology of contact or contact with a Wellbore is improving fairly dramatically at the moment.

How would you characterize the uptake today versus what you might have thought 12 months ago?

Suddenly accelerated.

I mean, 12 months ago we were experimenting with a lot of this stuff.

But it's now, I think, accelerating.

I think our issue is going to be providing it.

Second question from me.

A lot of discussion on mix internationally.

Obviously shift towards exploration hopeful.

Are you seeing a discernible difference in the oil/natural gas mix on the exploration side given the tightness in the global gas market?

Regionally, yes.

In other words, there is a lot of gas exploration in the middle east, for example.

Globally, I would say it's still reasonably balanced between oil and gas.

What we are seeing more and more is, you know, as you point out, the shortage of worldwide gas means that people are starting to look unconventional sources of natural gas overseas, which is something we thought would come much later.

I mean, you must have seen some of these deals in Australia.

Mm-hmm.

Where operators are going after coal-methane for example, even to feed OMG sometimes So this is pretty different.

As I understand it correctly, the revenue per rig and profit per rig in international gas is even greater that be the difference in North America.

Is that --

In the big O.M.G.

projects, that's undoubtedly the case.

The point being that most of the developments have penalties attached to late delivery of the gas.

Therefore, execution of the development projects is key.

Super.

Thanks, Andrew.

Thank you.

Our next question is from Chuck Minervino of Goldman Sachs.

Good morning.

I just want to talk about your comments this morning.

You talk about rigless work a number of times.

I was wondering if you could give us a percentage of what total revenue it rigless and how those margins stack up relative to the overall business?

I don't know is the honest answer today.

It varies very much by country by country and area by area.

When we have campaign of rigless work, the margins are really very good because we normally get to control the execution, which means we can be extremely efficient in the use of our resources.

So, you know, I mean, we mentioned for example one or two contracts in the press release where we have 300 wells to do.

If we control the logistics on that the margins are very good.

I guess on Latin America on margins specifically, it looks like you're getting closer to those peak levels that you reached in 2007.

Is it safe to say the start-up costs in Mexico are behind the Company at that point and could you see margins potentially go higher in Latin America as those costs are completely wound out?

Actually, I think that the margins in Latin America are less that be the start-up costs now will be driven by the drilling performance.

We still have room to improve there so to the extent we improve, margins would improve.

I would also say that in Latin America there is the same shift as everywhere else towards more drilling, particularly of exploration wells, and therefore the actual revenue mix is going to improve.

Not just IPM.

Thank you.

Thank you.

We'll move to the line of Alan Laws of Merrill Lynch.

Good morning.

I have a question on the directional drilling side.

Directional drilling continues to be a pretty solid product line for a number of years here globally, and you've recently made a small Canadian directional acquisition.

Could you comment on maybe how tight the directional drilling market is today and more specifically maybe how you see the north American market for directional services and the context, I guess, of higher directional rig count and then a rising rig count?

Well, I think that if you watch the rate of growth in the horizontal rig count in the US compared to the vertical rig count - - for all sorts of different reasons, be they geological reasons or be they infrastructure reasons there's no doubt that directional drilling will go on increasing, but directional drilling in North America has to be provided at a cost that is effective, otherwise it's not going to grow the way it should be.

Our purchase of Extreme Engineering brings us a service where we can use MWD without manning it probably by monitoring it from a centralized drilling center.

So we still think that it has in the land market both in the US and overseas a long way to run.

When you look at that as a growth driver, how are you assessing that for Schlumberger?

Are you looking at investing in maybe the lower end directional tools or is this --

No, we could have built one ourselves but the fact is that Extreme Engineering was the company originally funded by Shell, with technology from Shell.

And the decision, having it available immediately through buying the company rather than developing our own became fairly obvious because of the rate of growth in the market.

Last question would be on the bit side.

You talked about wanting to be back in the bits business.

Can you talk a little about - - no pun intended there - - about strategic thinking behind this and what aspects of the product line that are most important to you?

Well, I mean, the access to bit technology is because of the interface between bit technology and the B.H.A.

and the steering capability.

So, you know, we need access to bit technology.

We don't necessarily need to own a bit company.

When you're planning to address this desire, is it more through joint venture or technology sharing?

How do you - -

We actually do own a small bit company where we can build our own prototypes.

We probably would let out the manufacturing of those prototypes and the license to one of the existing big companies.

Thank you very much.

Thank you.

Our next question is from Jim Crandell with Lehman Brothers.

Please go ahead.

Good morning.

Andrew, would you expect your seismic results in the second half to comfortably exceed those of the second half of 2007?

Hold on a second.

I would expect them to comfortably exceed the first half of 2008, and yes, they would.

Yes, we think they would comfortably exceed the first/second half of 2007, yes.

I have just questions about two specific contracts.

You mentioned the people will not win these big offshore contracts on price.

I want to you comment on [INTEQ's] big win on the [petro-bus] work in Brazil and what you make of that.

Secondly, I want to ask you about the area in Mexico, you know, Weatherford bidding less on ATG1 and ATG2 than you bid on 3 and whether you think you'll have to bring your prices down on future work.

Well, I don't like commenting on competition's pricing policy, Jim.

I don't think [INTEQ] is a good competitor.

I don't think that their Brazil win was on price.

And, (inaudible) you know, all I can say is that the big companies bid roughly the same price and some bid by very low.

And I wish them the best of luck in execution.

But would you think that would impact your prices that you would have to work for, for the future?

It depends on how well they execute?

If they execute well and they continue, you would think they would come to you and expect to you lower your prices?

In future bidding rounds, prices would go lower, yes.

Okay.

Thank you.

Thank you.

We go to the line of Mike Urban of Deutsche Bank.

Please go ahead.

Good morning.

A couple of regional questions.

First, Russia had some favorable, some improvement in the upstream tax regime there.

How quickly do you think that'll translate into activity improvements in Russia?

I mean a little bit at the end of this year but much more next year.

Okay.

Second one is in Saudi, where you'd spoken about activity levels in Saudi kind of leveling off here over the next year or 18 months or so.

Given the rapid increase in oil price that we've seen and some of the comments out of the Saudi's themselves in terms of once again taking up their capacity, has your view on that changed at all?

Not for oil.

For gas, yes.

In other words, the Saudi's, I think, will probably undertake some major gas development programs inside the kingdom but not for oil.

So oil kind of leveling off, gas rising so on average in the aggregate I guess continued increases --

Yes.

Activity in Saudi?

Yes.

That's all for me.

Thank you.

Your next question is from Geoff Kieburtz with Weeden.

Good morning.

I'm trying to connect the dots.

Big increase in Cap Ex.

You talk in the press release about the strong bidding activity, but it seems like that comment was tied to offshore.

And you said in the press release that the international land business is developing as expected.

Then in some of your other responses to questions, it seems like it was the international land that was driving the big increase in Cap Ex.

Can you help us understand that a little bit?

I was answering the question in function of what Alan asked us about how we planned our Cap Ex for 2008.

2008, we planned the offshore Cap Ex pretty much, you know, but we probably didn't expect -- we expected land to respond.

We didn't expect the US to respond.

Therefore globally on land we need more Cap Ex.

Is the international land also stronger than you had expected?

In some places, yes.

No, generally yes, Geoff.

It's not dramatically stronger except in the US.

But generally it's a bit stronger than we probably originally anticipated.

The size of the Cap Ex increase would suggest that you have confidence continuing into '09 I'm inferring?

And as I mentioned, we have had some contract wins, which means we've had to revise some of the numbers for offshore as well.

Oh, okay.

All right.

Second question.

You said that the development of unconventional resources internationally was progressing more quickly than you expected.

Does that raise the prospect of frac capacities emerging internationally over the next year or two?

I think we've known for sometime that the growth in the frac market overseas is going to be much stronger than people would have imagined two or three years ago.

So I'm not sure whether that produces the capacity crunch or not because it'll depend so much on North America.

It's the nature of the capacity required for those international projects in terms of the equipment and technology.

It's similar to what's used in North America or different?

Except you don't have the same logistics.

Right.

Therefore, you need a lot more support than you do in North America.

Thank you.

Thank you.

Our next question's from Doug Becker of Banc of America.

Please go ahead.

Thanks.

Andrew, just want to touch base on third party revenues for IPM.

The fist quarter release talked about third party costs accounting for 45% of IMP revenues for full-year 2008.

The fist half has been running something between 33 and 34, implying a big pickup in the second half of the year.

Is that still the case or has something changed there?

I'm going to ask Simon to answer that if that's okay.

So, I mean, it depends on the area.

Overall, all what you've seen it's 34%, yes this is the current level of the third party revenue IPM.

As we go forward and the projects ramp up is increasing, we will see an increase in the third party.

For example, in Mexico, obviously it is more than 34%.

As you see the project ramp up increasing in the future we are going to see that this percentage slightly increasing but not significantly.

So it sounds like the 45% for full year 2008's a little high?

It could be high if because we are increasing IPM revenue in other places where the third party is less significant than what we have in the Mexico GeoMarket.

Based on previous commentary, it suggests even with third party in Latin America, specifically Mexico, that margins can still be expanding?

Two elements in Latin America increase the margins this quarter.

Was the start-up as Andrew mentioned.

As we mentioned in the project also as Andrew mentioned and as the efficiency increases, the margins improve.

Okay.

Thank you.

We go to the line of David Anderson with UBS.

Please go ahead.

Also, an IPM related question here.

How big do you think the IPM market is from your standpoint on an annual revenue basis?

In other words, what is your annual revenue opportunity that you're going after and how do you expect to see this evolve in the next several years?

David, we don't look at it on that basis.

We look at it on a project basis.

So we don't pre-calculate a revenue target that we're aiming for.

We actually keep a portfolio of projects that we're going after.

Normally, apart from Mexico where the market is material, the sale cycle is two to three years.

So actually, I don't even want to disclose a number because it'll only encourage my friends in other places.

Okay.

I'm talking of my friends.

I have to issue an apology to my friends at Baker.

Apparently, I said [INTEQ] is not a good competitor when I was answering the question on Brazil.

I of course meant that [INTEQ] is a good competitor, which is why I don't think they won it on price.

Sorry.

I did notice you said that.

I guess one of the questions I had for you in there.

You mentioned some time ago you had a $5 billion in IPM backlog.

Do you care to put that out this now of what it is now?

It hasn't changed very much.

You also mentioned Russia.

You were much more confident in Russia next year.

Is that because of IPM coming through?

It's a Russia going forward will be a mixture of IPM and service contracts.

So do you have confidence that the government is going to be lowering the taxes?

Yeah.

You do?

Okay.

I guess on a different related topic of new build.

Deepwater runs around $100 million in total costs.

How much work of that is potentially for Schlumberger?

Potentially, it's our four big product lines.

So it's wireline, well services, drilling and measurements and testing.

Please don't ask me for a number.

A huge amount depends on whether that well is dry or it has a find.

The actual scope of the revenue, you know, can change by a factor of two or thee in function of whether or not the well finds anything or doesn't find anything.

Fair enough.

We were talking about your Cap Ex before.

I assume a big chunk goes to building out rotary steerable in anticipation to this?

I think actually there is another factor in drilling and measurements.

That is that with rig spread costs at 1.2, double the day rate so 1.2 million dollars a day, people don't fish for stock tools very much.

They just cement them in and sidetrack, which means the buildout of Cap Ex has to be adjusted for that.

Okay.

My last question is just on rotary steerable.

We talked about your Cap Ex before.

I assume a big chunk goes to rotary steerable in anticipation of the new builds?

Yes.

Can you quantify it for us how much capacity is expected to increase year-over-year in rotary steerable?

I would rather not.

Fair enough.

Thank you very much.

I'm sorry, I'd rather not.

That's all right.

Thank you.

Our next question comes from Robin Shoemaker with Citigroup.

Please go ahead.

Andrew, you mentioned several times on the call the number of offshore rigs being delivered in the next few years.

How far along are we either on the 35 rigs delivered this year or the 180 in terms of allocating contracts for oil field services on those new rigs and kind of what's your strategy to maximize your presence on each of those new rigs that are --

I would like to point out that the 35 this year are very much loaded on Q4.

Mm-hmm.

So they may actually slip some of them into '09.

If the equipment has to be bolted down so cementing units or pumps or some of the testing spread, then the contracts will tend to get allocated or are at least the contracts for the equipment at the time of the build.

For wireline, drilling measurements and testing services, I would say that probably about half the contracted rigs have already awarded those contracts.

And the reason they've awarded them is very often because they're operated contracts particularly for exploration rigs that are going to move from country to country.

If they tend to be in very mature theaters of operation like the North Sea or gulf of Mexico, they may come under existing contract or they will get bid much closer to the time.

Okay.

So if we compare the new -- the question is how are you doing on the new builds compared to the existing fleet of offshore rigs and your market share and various product lines?

Do you believe on the new rigs you are market share is the same, better, or worse?

So far, I think it's the same.

Okay.

We'll see where it goes going forward.

Okay.

Thank you.

We'll move on to the line of Kevin Simpson with Miller Tabak.

Please go ahead.

Good morning.

A couple questions.

One is just some clarification on Russia.

Andrew, could you, say, quantify year on year revenue growth in Russia relative to and margins relative to change relative to the rest of the broader segment?

Is it better or worse?

I guess I was expecting slower Russia.

Well, I think in the first half year, it probably exceeded the average of the rest of the Europe/Africa unit.

Don't forget we still have the effect of the acquisition in the fist half of the year.

So it will probably slow a bit in the second half of the year relative to the first half of the year.

Through the effect of the acquisition not through any lack of activity.

And we've been hearing some pain from some of the smaller competitors in the frac business there.

How are you -- did you feel the same?

The frac business has been tough, particularly in the South for the first half of the year, there was over-capacity.

And, did that bring Russian margins down for you overall?

Not overall, no.

Just quickly wanted to switch to North America.

You were reluctant to reach out on the '09 forecast that Kurt was fishing for.

Your customers all seem to be raising budgets, raising capital.

Pretty positive outlooks for '09.

Is the reluctance just a function of the volatility of the market and risk to gas prices or it's just too early to make the call?

Just too early.

I've been refuted for making too early calls on North America, so I thought this time I would wait a bit, Kevin.

If you like it's more in function of, you know, what Kurt said which is the very substantial increases in production, which we're seeing.

You have to take into account the summer and weather and all the rest of it.

How much is the current oil price affecting gas consumption.

The fact that there's so many factors in it now that it's quite difficult to make a longer term call.

In terms of allocating capital, you don't have to a make a decision yet --

No, we've got our cycle down so that we can make the allocation much later.

Thank you.

That's it for me.

Thank you.

The next question is from Rob MacKenzie of FBR.

Thank you.

I wanted to step back and address the stimulation of the share reservoirs more from a mechanical standpoint and try to get some idea - - One of the things I heard is being done recently, is called "zipper-frac" to me, where by you offset the placement of the fracs in the adjacent well-bore such that you create an oblique stress field.

How much do you think that has the potential to raise productivity?

It sounds like the [bar-nac].

Is that something that can help take the production from $3 million to $5 million a day along with other advances?

I have to tell you I just don't know.

What I will tell you is producing shell gas reservoirs geo-mechanics is fundamental.

It's in some ways more fundamental than Petra-physics.

I'm sure that's lots going on an how you can alter stress fields in such a way to release the gas.

One of my top scientists spent some time looking at this recently.

One of the biggest issues with shell gas is nobody actually knows what the production mechanism is.

You may well be right.

I don't know.

What I do know is there's still a lot of work to be done on how these production mechanisms actually work.

Okay.

A follow up.

I wonder if you can share with us what you do know about how the shale oil production mechanism works, say in the [backen] shale?That's still kind of a mystery to me.

Wonder if you could shed some light on that?

I don't know.

I do know I'm aware of the different technologies that some of the majors are working on for the production of shale oil but I honestly haven't had a discussion of this in the context of [backen].

But, what I will do is get Malcolm to find out and give you a call, okay?

Thanks very much.

Thank you.

The next question is from Pierre Conner with Capital One.

Andrew, you addressed the capital changes on oil field services.

I wonder if you could speak a little about reconciling your change in outlook on Cap Ex or WesternGeco related to construction on the Eastern eco vessels and also the change on the expected Cap Ex from multiclient.

What's sort of driving that?

So there is no underlying change in our philosophy.

Okay.

On the construction of the vessels.

We have one vessel that is delayed about four months which was supposed to come right about now but it's not coming until the end of the year.

The Eastern eco vessels seem to be pretty much on schedule, therefore there is no change on Cap Ex.

On multiclient, we have seen in the last quarter some improvement on prefunding levels, therefore --

Less Cap Ex.

I think we've increased slightly our budget but really it's marginal.

I would say that compared to what we've showed you at the end of the first quarter, there's really no substantial change.

Okay.

Thanks.

Now, you mentioned that Marine bidding was robust.

Did we read through there at there's still pricing power?

In certain segments of the Marine market, there's still pricing power, yes.

My follow-up is to try again sort of Kevin and Kurt on America, but I'm assuming that when you're rolling North America that your conviction improvement is inclusive of Canada as well, is that correct?

Yes.

Maybe a different way to ask would be do you know of a commodity price level, rather that we all have many variables in front of us weather, et cetera.

What is this increase from your customer perspective due to the price increase, not just new developments?

You mean our price increases?

No, I'm sorry, the commodity price increase.

I think our current level's just fine.

There is some guarantee of future activity to the extent to which our customers have hedged their foreign production.

I certainly think that production drops in Canada will mean a very healthy Canada through the rest of this year and the first quarter of next year.

I'm just not prepared to take a definitive position on North America, the whole of North America land for next year yet.

I just don't feel comfortable doing it.

Sorry.

I understand with the variables in front of us.

Thank you, gentlemen.

Thank you.

Our final question comes from Alan Laws of Merrill Lynch.

Just a quick high level follow up question on growth.

When you look at the most important trends for Schlumberger over the next few years if you look at rise of exploration or expansion of the offshore recount or well -- the increasing well complexity, architecture or straight out IPM, what would be the number one driver?

I think there are probably two drivers.

I'm thinking three to five years now, ok?.

The first driver has to be the extent to which there is a real effort to renew the reserve base and therefore exploration which will largely be either offshore or in harsh environments.

As I mentioned in answer, to I think it was Michael's question earlier, the current gas situation is such that a lot of gas exploration that was not planned two or three years ago is going to happen.

So the first is exploration.

The second is I said this before, and I'll say it again.

The secret to stemming decline curves is number one, you have to drill.

Number two, you have to increase the amount of reservoir contract.

The service intensity around stemming the decline curve will have to increase fairly dramatically if people are serious about it.

Actually, I think that a little bit of what we saw in Q2 with the extremely high commodity price.

Sure.

Great.

That's good for me.

Thank you.

On behalf of the Schlumberger management team, I would like to thank you for participating in today's call.

Julie will now provide the closing comments.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 10:30 a.m.

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